Recent Buy: Bank of Montreal (BMO)

The markets continued their decline this week, with the TSX breaking below the psychological 12,000 level. Although the losing streak appeared to take a turn upwards on Wednesday morning, many investors are still remaining on the sidelines. Whether the markets will continue to decline in another sell-off, or continue on another Bull Run is anyone’s guess. When markets dip, it’s an opportune time to buy shares of companies on your watch list, or top-up current holdings.

Having sold my index equity funds back in early March, I was delighted when markets began their decline this April. It presented an opportunity to buy some good companies on sale for my TFSA (Tax Free Savings Account). After all stocks have had a good run-up of late. With a few thousand in cash to go shopping for stocks I bought 100 shares in Husky Energy, and on Tuesday I used the remaining cash on hand, to purchase shares in the Bank of Montreal (BMO) at $58 per share. This will be a long term holding I will be adding to in the years to come. In fact, I’m already DRIPping shares of BMO with Computershare. Eventually I’ll add the Computershare BMO shares into my TFSA with TD Waterhouse, and DRIP the full shares there tax-free!

About BMO

BMO is Canada’s 4th largest bank (see table below) with a market capitalization of 37.2 billion dollars, and most importantly a generous dividend yield of 4.8%. BMO has a current Dividend Payout Ratio of 49.73. BMO also has a profit margin of 25.9% and a one year return on equity of 13.48%. The Bank of Montreal makes money from interest on lines of credit, mortgages, and credit cards, as well as insurance and various processing fees. And of course BMO Asset Management runs various mutual funds and ETFs – ZWB being one of the most popular ETF’s in Canada. Even with nominal interest rates, the Canadian banks are still making money hand over fist, and continue to be some of the most profitable and stable businesses in North America.

Here is a quick comparison of the Canadian Banks:

[table id=28 /]*DPR = Dividend Payout Ratio (EPS/Annual Dividend x 100). Note the EPS of 3.26 for RY as provided by the Globe and Mail was incorrect. The correct EPS is 4.32 resulting in a DPR of 52%.

After the Financial Crisis

Back in October 2010, I wrote a post Are the Canadian Banks Overvalued. In that post I looked at some of the reasons why Canadian Banks have done so well, and I also looked at their huge run-up in share price since their lows in 2009. BMO had the highest gain of over 112%. Interestingly BMO was trading around $60 back in October 2010, not much different than it is now. But of course, you can count on the 4.7% annual dividend yield. Had you bought shares of BMO back in March 2009 you would have already doubled your money and been paid to wait with the generous dividend. 😉

What Are The Risks?

One thing you have to consider with the Canadian Banks however is debt. While they don’t appear to have any debt on the balance sheets – they are actually in the business of debt. Banks are the only business I am aware of where debt is considered an asset. These assets includes lines of credit to consumers and business, consumer credit card balances, and of course residential mortgages. So figuratively speaking, the Canadian Banks are up to their eyeballs in debt.

So far banks have been doing well with low interest rates, but as David Trahair pointed out in his recent book Crushing Debt, a sudden shock to the financial system, or a sudden or sustained rise in interest rates, will put pressure on consumers, many of whom are already simply making ends meet. Banks can handle a degree of bad debts, or loan loss provisions as they call them. However a significant degree of provisions would definitely impact their bottom line. Recently the Volcker Ruling in the U.S. may also have an impact on Canadian Banks. Nonetheless, I’m certain the Canadian Banks will weather whatever is thrown at them in the years to come.

Readers, what’s your take? Do you own BMO or are you interested in buying it? What do you think of the Canadian Banks?

I’m a fan of the Canadian banks and once BMO hits the 5-year mark for dividend growth I’ll strongly consider it as an investment. Heck, I might even consider it before then. As I said on my site, while I like companies that continued to raise their dividends through the recession, the Canadian banks still did MUCH better than the big U.S. banks by at least freezing their dividends instead of cutting or eliminating them. That speaks volume about their strengths.

Woot Woot! Mantra approved. 🙂 Hey Mantra like I commented on your blog today, many of these Canadian companies also trade on the NYSE as well – so you can own a couple of Canadian Banks, without worrying about foreign income.

While I wouldn’t want to overweight my portoflio with them, I think the Canadian Banks are pretty solid. Heck they even thrived when interset rates were through the roof in the 80’s to early 90’s. They have been through some phenomenal challanges and done well. I wonder what the next challenge will be for them… rising interest rates?

I bought some BMO a couple of weeks ago. It’s the only banking stock I own since I’m pretty heavy into O&G (I work in the industry too – which is kind of bad for diversification). My bank and investing account is with RBC and some of my mutual fund money is tied up with them.
I’m kicking myself that I didn’t throw a bunch into banking stocks directly in ’08-’09. 🙁

Anytime your portfolio is wieghted to companies with stock options, or over-weighted to an industry you work in, don’t you think that’s a dangerous precedent?

You and me both! I should have sold my mutual funds right at the start of 2009 and backed up the truck. 🙂 BMO did very well, as did most of the Canadian banks.

Cheers

Michel

Apr 14. 2012

I agree with most of the comments. I own all of the big banks including Laurentian and Canadian Western Bank (CWB). I bought CWB four years ago for the capital growth and the dividend growth. in a few years my “yield on cost” should be way up there.

Sometime could you write a detailed how to of DRIPping shares in TD Waterhouse. I invest with Waterhouse and am unclear of how I could do this. I am not in a position to do so yet but I would like to be able to.

Also maybe write a bit about Computershares. I have read about it but again my knowledge could be bolstered.

DRIPping shares with TD Waterhouse is real easy! Remember with a discount broker you can only DRIP full shares (synthetic DRIPS). That means you need to have enough dividend income (per payout) to buy at least one share. The remainder is distributed as cash. You simply phone TDW and tell them to DRIP the stock, or DRIP your entire portfolio. It’s that easy!

For FULL DRIPS like Computershare, its a lot more detailed and time consuming, you really have to be a DIY (do it yourself) investor! See my archives page under DRIPs. 😉

I bought BMO yesterday at $57.80. Hopefully, that is the support. I also have been holding BMO for a while now in my RRSP at $60.60.. still waiting for it to pop back up before moving on. DO you think it’ll go back up to that price?

I have no idea whether the market is going up or down, or what share prie BMO may be in the next few months or year – in fact it really doesn’t matter to me. I’m really buying BMO for the long-term dividend income. If I get some solid capital growth out of it, that’s a bonus. 😉

Cheers

Peter

Apr 14. 2012

I think Jacq meant oil and gas stocks (O&G). Personally, I own a lot of that too, mainly because of valuation (eg. what you talked about HSE =) Thanks for the DRIP info on HSE, and I will hope to receive letter in the mail.

I bought BMO, too on Friday. Looks like the only bank that might be undervalued out them all. Only worry is how they are gonna do in the US, and I don’t think they are diversified outside of North America.

BNS is the Canadian Bank with the most international exposure. I don’t see BMO’s assets primarily based in North America as a bad thing to be honest – it’s one of the reasons I chose it over BNS. Depends on your perspective. 😉

Hey Paul, thanx for the comment! and I’m going to read your post you linked to..;) I think you hit the nail on the head here, I felt BMO was undervalued compared to its peers. We haven’t seen much growth in BMO of late, but if they have a couple of profitable quarters and do raise the dividend – off to the races. 😉 It really doesn’t matter to me, I’m very happy with the yield 🙂

Going to look around your blog – looks very interesting. Cheers!

Rob

Apr 17. 2012

I’m definitely a fan of the Canadian banks too. So far I only have BNS. I like the way BNS is spread – they seem to be making smart decissions outside the country as well as here in Canada. I plan to add CM in the future, but now I may have to take a closer look at BMO too.

Through thick and thin the Canadian banks seem to be a pretty solid dividend source and I plan for them to form a decent chunk of my Canadian DRIP portfolio.

Hey Rob, that’s great! Just make sure you don’t overweight your whole portfolio with them – and keep diversified among sectors. 😉

Cheers

DividendCoward

May 08. 2012

I’m not the most savvy of investors but to go along with what most people have said on this thread… I think BMO is very favourably priced and it was my initial purchase when I started DRIP’ing (computershare). I have seen it rise and fall but right now I would consider it cheap and think you both (Ninja & commentator) got a great price at ~$58. Now time to get back on track with my investing! Sometimes it’s hard to keep to those monthly cheques (and hard to choose extra payments on the student loan vs BMO some months witht he fluctuating prices!). So far my small investments have mostly mitigated my interest on my student loan which is nice to see; now for the compounding years to come!

DividendCoward Thanx for posting! Yes I think BMO is a pretty reliable stock – a set it and forget it Canadian bank. Good for you using Computershare and DRIPping the shares and saving on fees.

It’s always best to pay off debt, that is always your best investment! However if your student loan is a low rate, then paying off the loan and investing is not a bad way to go. That way you will have a nest egg started with compounding growth by the time the loan is paid off. If you had credit card consumer debt, however, then I would strongly encourage you to pay that off first before even considering investing.

All the best!
Cheers

Aggressive

Oct 12. 2013

Hello,
it’s a good post.
I enjoyed reading it.

I have few questions for you. It’s October 2013 and the situation today is different BMO stock is upto $68.

I’m a landed immigrant and new to stocks too so I don’t know much about here so I’m directly asking this question to you.

1. What is TSFA exactly (Tax Free Savings Account)?
so for example I have some of my shares in Bank of Montreal currently with computershare.
so when I sell them I will need to pay tax on my dividends and capital gains.

alright so does that mean if when I sell my shares and put it into TFSA account, I do not have to pay any taxes?

2. BMO is currently trading at $68.83 something, how do I figure out that is this an under-valued stock or over-valued stock? The price keeps on rising every month and I don’t know when to jump in and dip my toes into it.

I’m definitely going to search this blog if you have any article for that.

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